Warsh vows 2% inflation target, opens door to rate hikes

Federal Reserve Chair Kevin Warsh said inflation has not meaningfully slowed and policymakers must see it moving toward the 2 percent target "clearly and at sufficient speed" — otherwise, "we have work to do."

"My standard is this: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That is our job," Warsh said in prepared remarks at the annual Jackson Hole Economic Policy Symposium in Wyoming on Friday.

Core PCE inflation — the Fed's preferred gauge — held at 3.3 percent year over year in July, while headline PCE stayed at 3.7 percent, both well above the central bank's 2 percent target. The Federal Open Market Committee left the federal funds rate at 3.5-3.75 percent at its July meeting on a 9-3 vote, with three dissenters favoring a 25-basis-point hike. CME FedWatch data shows a 45 percent chance of a hike by the December meeting.

Warsh's hawkish tone lands as the 30-year Treasury yield reached its highest level in 19 years last week, prompting Treasury Secretary Scott Bessent to double long-dated bond buybacks in an unusual intervention. The Fed's next policy meeting is September 15-16, and Warsh's remarks do not necessarily signal a move then.

Warsh, who was confirmed as Fed chair in May, has taken steps to end the use of forward guidance about future policy moves, including removing forward-looking language from post-meeting statements and having a panel review Fed communications. In his speech, he acknowledged his "long-time discomfort with early pronouncements of future policy decisions" and argued that forward guidance "has outstayed its welcome."

"Forward guidance as a regular practice was adopted by my colleagues and me during the global financial crisis. It was essential at the time, and we introduced it with much fanfare. But as with other legacies of crises past, I believe the practice has outstayed its welcome," Warsh said.

He also said the Fed should not "indulge a regime in which market participants are looking primarily to the Fed for their next trade."

Bond Market Tightening

The absence of forward guidance has left investors guessing. Since Warsh took the helm in May, the benchmark 10-year Treasury yield has climbed 8 basis points, while the 30-year bond yield has advanced 10 basis points. Rate futures now price a 40 percent chance of a hike at the September meeting, up from 33 percent a week ago, according to CME FedWatch.

Gregory Daco, chief economist at EY-Parthenon, said there is a "tremendous degree of uncertainty" about Warsh's approach, but also "tremendous appetite" for him to clarify his views on data, inflation, employment, and policy. Daco noted that Warsh's comments in June suggested markets were telling him inflation was coming down, while in July he said higher yields were contributing to tighter policy.

"You can't have both," Daco said. "If you want a pure signal from markets, you have to be honest about what markets are telling you."

Some investors share Warsh's view that the bond market has already done some of the Fed's tightening work. George Catrambone, head of fixed income Americas at DWS, argued that higher long-term yields have tightened financial conditions substantially, reducing the need for policymakers to raise rates. The Treasury's expanded buyback program is unlikely to eliminate upward pressure on long-end yields if investors continue demanding greater compensation to hold longer-dated debt, though stronger Fed credibility on inflation could help.

AI and the Growth Outlook

Warsh also addressed the impact of artificial intelligence on the economy, saying progress has been "faster than anticipated" and that the "potential for substantially higher growth is on the rise." He noted "ever-expanding pools of capital pouring into AI-related infrastructure" and described a "kind of super Moore's law" playing out. The Fed has created an AI task force to track productivity, employment, and returns across labs, chipmakers, energy producers, and cloud providers.

The last time the Fed faced a similar inflation challenge was in 2022, when then-Chair Jerome Powell used his Jackson Hole speech to signal continued sharp rate hikes, acknowledging the moves would bring "pain" to consumers and businesses. The Fed ultimately raised rates to a peak of 5.25-5.5 percent before beginning cuts in late 2024.

Warsh's commitment to the 2 percent target regardless of timeline suggests a more restrictive posture than markets may have priced in. If inflation data continues to run hot, the Fed could face pressure to hike rates before year-end, which would push Treasury yields higher and strengthen the dollar, raising borrowing costs across the economy.

This article is for informational purposes only and does not constitute investment advice.